Debt ceiling debate, public radio, numbers and more.

On the way to work today and on the way back National Public Propaganda Radio was running pieces on the national debt and the debt ceiling.  Not surprisingly the several guests they brought were of the same opinion, any failure to raise the ceiling immediately would result in a catastrophe.  Their explanation was quite simple and partially correct and as usual the devil is in the details and NPR has masterfully ignored them.

NPR and the guests they have procured have recited a popular rhetoric.  A default will cause the interests rates to skyrocket and the value of the dollar to plummet causing long term economic damage.  That is correct, provided of course that the US Treasury chooses to not pay the interest on outstanding debt or pay out maturing debt.  Failure to not pay for schools, agricultural subsidies, homeland security, military bases, lavish transportation costs for Congress and even social security/medicare will not in any way impact our credit standing.  The only way that America can ruin the credit rating is to forego on its external responsibilities.

What are those responsibilities?

Quite simply, as of 2010 the payments for the outstanding interest stood at: 210 Billion dollars.

As a matter of perspective, this this is how much the US Treasury collected in taxes: 1.09 Trillion dollars.  (This does not include social security, ad-valorem and other revenues amounting to an additional Trillion).

Therefore, the only way to really default is to willingly take the two trillion dollars in revenue and purposely and maliciously *not* pay the interest, or a mere 10% of total revenues.

Everything else you are hearing is pure demagoguery, propaganda and misleading information designed to instill fear and terror.

Now the more sticky and unpleasant question is raised, that is, if the ceiling is not adjusted then the US Government is going to stop paying out certain obligations.  So which ones?

Social Security:  As of now this is a non-issue.  In 2010, 864 Billion was collected and 790 Billion paid out.  Therefore the biggest promise of all is still somehow revenue positive and under no circumstances should/could deprive senior citizens their own money.  The fact that the social security fund is actually broke is an entirely different issue.

Defense:  In 2010, 960 Billion was spent.  Think about that for a moment.  A staggering number.  Of that number only 140 Billion was spent on Veterans and can be considered an unbreakable promise.  The remainder is a luxury in the form of equipment, bases, material, salaries, etc.

Health Care:  In 2010, 880 Billion was spent.  Of that, 490 Billion spent on Medicare, the remainder is welfare.  Medicare is a promise that must be kept.

That leaves four promises that the US Government, pending serious reform must pay out in 2011.
Social Security: 790
Medicare: 490
Veterans: 140
Interest: 210
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Total: 1.6 Trillion (2010 numbers)


Revenue looking at only two sources comes out to:
Income Taxes: 1.09 Trillion
Social Security: 864 Billion
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Total:  1.95 Trillion

That leaves 300 Billion to pend on critical defense, keeping Congress operating and unemployment/welfare and paying out maturing treasuries.

Everything else "defaults".  Is this a solution?  No.  Is this sustainable?  No.  Are people going to get angry?  Of course!   We are paying over 1 Trillion in taxes and under this "default" there will be virtually no services what so ever.  However this will underscore the need for social security/health reforms and will illustrate to the public that our spending structure is unrealistic.  Not raising the debt ceiling will actually force Congress to finally do their jobs instead of kicking the can down the road.

Our investors will get their payments and will be absolutely content.  To them it does not matter whether or not the Departments of Education and Energy suddenly shut their doors. In fact, if anything, it will instill more confidence in our credit system because the revenue ability of the country remains unchanged while spending dramatically plummets!

Any ideas or notions of ignoring interest payments are silly and downright stupid.  Anyone who thinks we can just selectively default on certain bonds is smoking crack.  For example an idea was floated to ignore all bonds purchased by the Federal Reserve - not going to happen.  Even if they purchased these bonds with printed money a domestic default will cause massive damage to the fragile banking system.

Nope, we have to suck it up and pay the piper.  We just need to do it honestly and without the propaganda.  We need to have a mature and serious conversation about austerity which is inevitable and the role of the Federal Government in our lives.  So far, there is no indication that this country, president, Congress or media is prepared to have this kind of conversation.